Extent of government support and key indicators of

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extent of government support and key indicators of success in housing policy, such as the home- ownership rate and housing affordability. The international evidence that we presented in Chapter 7 lends further credibility to our recommendation of reduced support for home ownership in the U.S. And the fact that government involvement in fact contributed to the boom and bust cycle makes the case for reduced support even stronger. As we have noted before, house prices fell more in the United States than in most other countries, the financial crisis was deeper, and the macro-economy contracted more sharply than in many other economies. There is perhaps some link between government support through the GSEs (through their guarantee function rather than through their investment function) and the emergence of the 30-year pre-payable fixed-rate mortgage (FRM) as the standard mortgage contract in the United States. 75 Without well-developed secondary markets for mortgages, it is hard to sustain this mortgage product. The fact that this product thrives elsewhere only in Australia and Canada, which also have well-developed securitization markets, is a testament to this point. Some have argued that a larger fraction of FRMs has the benefit of macro-economic and monetary stability, as it makes households’ balance sheets less vulnerable to interest rate changes. To the extent that U.S. households have come to know and love this product, any GSE reform should consider the importance of maintaining a strong securitization market so as to preserve the availability of a long-term fixed-rate mortgage product. (However, the issue of whether FRMs should allow pre-payments without fees is a separate matter.) Even if there is a smaller proportion of FRMs in the steady state due to reduced GSE involvement, in the
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132 transition these mortgages will continue to be the most important part of the mortgage market. The private-public partnership we proposed in the previous chapter would be one way to provide such support to the securitization market. There also seems to be a link between the recourse laws and mortgage foreclosures. Because households are able to walk away from their mortgage debt more easily, the U.S. faces a much deeper foreclosure crisis than do other countries. Strengthening and facilitating recourse reduces the credit risk in the mortgage market -- arguably substantially. On the one hand, this may lead to more prudent borrowing on the part of the households and better allocation of credit in the economy. It could lower mortgage rates for all, as lenders pass on the gain of lower foreclosures to all borrowers. On the other hand, being able to walk away from a mortgage offers households in trouble a fresh start, which may be desirable from a risk-sharing perspective, and may promote more labor market mobility. On balance, mopping up seems much harder than saving for the rainy day. The stability of mortgage finance may be substantially enhanced by a strengthening of the recourse feature for mortgage lenders in the United States.
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